Nanakuli Paving and Rock Co. v. Shell Oil Co., Inc.

• Decision Date: 21 December 1981
• Docket Number: 78-2670,Nos. 78-2667,s. 78-2667
• Parties: 32 UCC Rep.Serv. 1025 NANAKULI PAVING AND ROCK COMPANY, a Division of Grace Brothers, Ltd., a Hawaii corporation, Plaintiff-Appellant, v. SHELL OIL COMPANY, INC., a Delaware corporation, Defendant-Appellee. NANAKULI PAVING AND ROCK COMPANY, a Division of Grace Brothers, Ltd., a Hawaii corporation, Plaintiff-Appellee, v. SHELL OIL COMPANY, a Delaware corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 772

664 F.2d 772

32 UCC Rep.Serv. 1025

NANAKULI PAVING AND ROCK COMPANY, a Division of Grace

Brothers, Ltd., a Hawaii corporation, Plaintiff-Appellant, v. SHELL OIL COMPANY, INC., a Delaware corporation, Defendant-Appellee.

NANAKULI PAVING AND ROCK COMPANY, a Division of Grace

Brothers, Ltd., a Hawaii corporation, Plaintiff-Appellee, v. SHELL OIL COMPANY, a Delaware corporation, Defendant-Appellant.

Nos. 78-2667, 78-2670.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Sept. 9, 1980.

Decided Dec. 21, 1981.

Edwin L. Doernberger, Cades Schutte Fleming & Wright, Honolulu, Hawaii, argued, for plaintiff-appellant; James S. Campbell, Honolulu, Hawaii, on brief.

George L. Saunders, Jr., Sidley & Austin, Chicago, Ill., Harold S. Levy, New York City, argued, for defendant-appellee; John A. Hoskins, Hoddick, Reinwald, O'Connor & Marrack, Honolulu, Hawaii, on brief.

Appeal from the United States District Court for the District of Hawaii.

Before BROWNING, Chief Judge, and KENNEDY, Circuit Judge, and HOFFMAN, ^* District Judge.

HOFFMAN, District Judge:

Appellant Nanakuli Paving and Rock Company (Nanakuli) initially filed this breach of contract action against appellee Shell Oil Company (Shell) in Hawaiian State Court in February, 1976. ¹ Nanakuli, the second largest asphaltic paving contractor in Hawaii, had bought all its asphalt requirements from 1963 to 1974 from Shell under two long-term supply contracts; its suit charged Shell with breach of the later 1969 contract. ² The jury returned a verdict of $220,800 for Nanakuli on its first claim, which is that Shell breached the 1969 contract in January, 1974, by failing to price protect Nanakuli on 7200 tons of asphalt at the time Shell raised the price for asphalt from $44 to $76. ³ Nanakuli's theory is that price-protection, as a usage of the asphaltic paving trade in Hawaii, was incorporated into the 1969 agreement between the parties, as demonstrated by the routine use of price protection by suppliers to that trade, and reinforced by the way in which Shell actually performed the 1969 contract up until 1974. Price protection, appellant claims, required that Shell hold the price on the tonnage Nanakuli had already committed because Nanakuli had incorporated that price into bids put out to or contracts awarded by general contractors and government agencies. The District Judge set aside the verdict and granted Shell's motion for judgment n. o. v., which decision we vacate. We reinstate the jury verdict because we find that, viewing the evidence as a whole, there was substantial evidence to support a finding by reasonable jurors that Shell breached its contract by failing to provide protection for Nanakuli in 1974. Quichocho v. Kelvinator Corp., 546 F.2d 812, 813 (9th Cir. 1976). We do not believe the evidence in this case was such that, giving Nanakuli the benefit of all inferences fairly supported by the evidence and without weighing the credibility of the witnesses only one reasonable conclusion could have been reached by the jury. Cockrum v. Whitney, 479 F.2d 84, 85-86 (9th Cir. 1973).

Nanakuli offers two theories for why Shell's failure to offer price protection in 1974 was a breach of the 1969 contract. First, it argues, all material suppliers to the asphaltic paving trade in Hawaii followed the trade usage of price protection and thus it should be assumed, under the U.C.C., that the parties intended to incorporate price protection into their 1969 agreement. This is so, Nanakuli continues, even though the written contract provided for price to be "Shell's Posted Price at time of delivery," F.O.B. Honolulu. Its proof of a usage that was incorporated into the contract is reinforced by evidence of the commercial context, which under the U.C.C. should form the background for viewing a particular contract. The full agreement must be examined in light of the close, almost symbiotic relations between Shell and Nanakuli on the island of Oahu, whereby the expansion of Shell on the island was intimately connected to the business growth of Nanakuli. The U.C.C. looks to the actual performance of a contract as the best indication of what the parties intended those terms to mean. Nanakuli points out that Shell had price protected it on the two occasions of price increases under the 1969 contract other than the 1974 increase. In 1970 and 1971 Shell extended the old price for four and three months, respectively, after an announced increase. This was done, in the words of Shell's agent in Hawaii, in order to permit Nanakuli's to "chew up" tonnage already committed at Shell's old price. ⁴

Nanakuli's second theory for price protection is that Shell was obliged to price protect Nanakuli, even if price protection was not incorporated into their contract, because price protection was the commercially reasonable standard for fair dealing in the asphaltic paving trade in Hawaii in 1974. Observance of those standards is part of the good-faith requirement that the Code imposes on merchants in performing a sales contract. Shell was obliged to price protect Nanakuli in order to act in good faith, Nanakuli argues, because such a practice was universal in that trade in that locality.

Shell presents three arguments for upholding the judgment n. o. v. or, on cross appeal, urging that the District Judge erred in admitting certain evidence. First, it says, the District Court should not have denied Shell's motion in limine to define trade, for purposes of trade usage evidence, as the sale and purchase of asphalt in Hawaii, rather than expanding the definition of trade to include other suppliers of materials to the asphaltic paving trade. Asphalt, its argument runs, was the subject matter of the disputed contract and the only product Shell supplied to the asphaltic paving trade. ⁵ Shell protests that the judge, by expanding the definition of trade to include the other major suppliers to the asphaltic paving trade, allowed the admission of highly prejudicial evidence of routine price protection by all suppliers of aggregate. ⁶ Asphaltic concrete paving is formed by mixing paving asphalt with crushed rock, or aggregate, in a "hot-mix" plant and then pouring the mixture onto the surface to be paved. Shell's second complaint is that the two prior occasions on which it price protected Nanakuli, although representing the only other instances of price increases under the 1969 contract, constituted mere waivers of the contract's price term, not a course of performance of the contract. A course of performance of the contract, in contrast to a waiver, demonstrates how the parties understand the terms of their agreement. Shell cites two U.C.C. Comments in support of that argument: (1) that, when the meaning of acts is ambiguous, the preference is for the waiver interpretation, and (2) that one act alone does not constitute a relevant course of performance. Shell's final argument is that, even assuming its prior price protection constituted a course of performance and that the broad trade definition was correct and evidence of trade usages by aggregate suppliers was admissible, price protection could not be construed as reasonably consistent with the express price term in the contract, in which case the Code provides that the express term controls.

We hold that the judge did not abuse his discretion in defining the applicable trade, for purposes of trade usages, as the asphaltic paving trade in Hawaii, rather than the purchase and sale of asphalt alone, given the unusual, not to say unique, circumstances: the smallness of the marketplace on Oahu; the existence of only two suppliers on the island; the long and intimate connection between the two companies on Oahu, including the background of how the development of Shell's asphalt sales on Oahu was inextricably linked to Nanakuli's own expansion on the island; the knowledge of the aggregate business on the part of Shell's Hawaiian representative, Bohner; his awareness of the economics of Nanakuli's bid estimates, which included only two major materials, asphalt and aggregate; his familiarity with realities of the Hawaiian marketplace in which all government agencies refused to include escalation clauses in contract awards and thus pavers would face tremenduous losses on price increases if all their material suppliers did not routinely offer them price protection; and Shell's determination to build Nanakuli up to compete for those lucrative government contracts with the largest paver on the island, Hawaiian Bitumuls (H.B.), which was supplied by the only other asphalt company on the islands, Chevron, and which was routinely price protected on materials. We base our holding on the reading of the Code Comments as defining trade more broadly than transaction and as binding parties not only to usages of their particular trade but also to usages of trade in general in a given locality. This latter seems an equitable application of usage evidence where the usage is almost universally practiced in a small market such as was Oahu in the 1960's before Shell signed its 1969 contract with Nanakuli. ⁷ Additionally, we hold that, under the facts of this case, a jury could reasonably have found that Shell's acts on two occasions to price protect Nanakuli were not ambiguous and therefore indicated Shell's understanding of the terms of the agreement with Nanakuli rather than being a waiver by Shell of those terms. ⁸

Lastly we hold that, although the express price terms of Shell's posted price of delivery may seem, at first glance, inconsistent with a trade usage of price protection at time of increases in price, a closer reading shows that the jury could have reasonably construed price protection as consistent with the express term. We reach this holding for several reasons. First, we are persuaded by a careful reading of the U.C.C., one of whose underlying purposes is to promote flexibility in the expansion of commercial practices and...